Hon Hai Riot Shows Squeeze on Chinese Manufacturers

A riot at a Foxconn plant in northern China was brought under control, but the plant remained closed Monday. The WSJ's Paul Mozur explains what the incident says about the growing unrest among China's laborers.

By

Paul Mozur And

Tom Orlik

Updated Sept. 24, 2012 11:00 p.m. ET

BEIJING—A riot at an electronics factory left at least 40 people injured and sparked a response by thousands of police Monday, highlighting how Chinese manufacturers increasingly are caught between restive workers and a slowing economy.

It also underscored the complex task ahead for Hon Hai Precision Industry Co. as it works to control costs at facilities that often are the size of small cities.

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Hon Hai's Foxconn Technology Group arm said a fight among several employees in a dormitory late Sunday in the northern province of Shanxi triggered unrest among roughly 2,000 workers that lasted into Monday morning.

Taiwan-based Hon Hai, the world's largest contract maker of electronics products for such clients as Apple Inc., said 40 people were hospitalized and an unspecified number were arrested.

The state-run Xinhua news agency said about 5,000 police were sent to the scene. The plant was closed Monday and reopened without incident Tuesday, Hon Hai said. Hon Hai spokesman Louis Woo said he didn't anticipate the shutdown would have an impact on production.

Some employees burned motorcycles and smashed shop windows before Chinese police and paramilitary personnel stabilized the situation early Monday, workers said. The factory, in Taiyuan, has about 79,000 employees, the company said.

Workers said factory officials shouted though loudspeakers at employees watching the dispute to go back to their rooms. "They shouted, 'There is nothing to be filmed or shot. Put your mobile phone in your pocket and go back to sleep,' " a male worker recounted.

The cause of the dispute wasn't clear, although employees said staff brought in from distant locations have been discontent.

Hon Hai said the original dispute appeared "not to have been work-related" but that an investigation was continuing.

ENLARGE

Workers clean up glass shards from the broken windows of a security room near an entrance of a Foxconn Tech-Industry Park in Taiyuan, Shanxi province on Monday.
Reuters

Employees said the facility produces parts used in Apple's iPhone and other electronic devices. Apple representatives referred questions to Hon Hai, which said the plant produces components for automobiles and consumer electronics but didn't disclose specifics.

The incident put a spotlight on growing tension in China's factories as companies struggle to meet worker demands for better compensation and work conditions even as economic growth slows. China's gross domestic product rose 7.6% in the second quarter from a year earlier, the slowest pace since the global financial crisis. The China Labour Bulletin, which tracks strikes and protests, reported an increase in such incidents, logging an average of 29 a month for the first eight months of this year, up from 11 a month for the same period last year.

To combat rising costs and worker attrition, Hon Hai has been moving its factories inland from the more expensive Chinese coasts.

But the pliant first-generation migrant workers that staffed factories a decade ago have become more savvy about their rights and willing to stand up for them. The second generation that has joined them on the factory floor are better educated and more plugged in.

"Some people are just not satisfied that Foxconn pays us so little and asks us to work long hours," a female worker said.

ENLARGE

Average wages in China's manufacturing sector rose 18.9% last year, according to China's National Bureau of Statistics.

"Younger workers are definitely more aware of their rights and more demanding," said Geoff Crothall, a China Labour Bulletin spokesman. "They want more out of life than simply earning minimum wage."

Managing such pressures at large production facilities presents a challenge for Hon Hai, which has been under a microscope since a spate of suicides at its factories in 2009. Hon Hai's facility in Taiyuan alone employs roughly the same amount of workers that General Motors Co. employed in the U.S. last year. The 79,000 Taiyuan workers amount to only a small portion of the roughly one million workers at Hon Hai's more than 20 plants across China.

Mr. Woo, the Hon Hai spokesman, said labor expenses aren't a major cost for Foxconn and that the more important question was whether China's younger workers will continue to have the desire to work difficult manufacturing jobs. "We cannot argue that manufacturing jobs are exciting for workers. It's kind of boring and requires a lot of hard work…so we have to change that, rather than hoping the workers will change," he said. That is why the company is moving to automate more of its production lines, he said.

Hon Hai's net margin fell to 1.4% in the second quarter from 1.5% in the first, continuing a downward trend from double digits at the end of the 1990s. The company's first-half profit rose only 0.5% from a year earlier, in part because of deeper losses from its contract handset-making unit.

It was unclear what sparked the Taiyuan dispute. But employees said workers from other facilities, including Hon Hai's factories in the southern Chinese city of Shenzhen, recently were brought in to help with a large order.

"Some of those people are not happy because they don't want to stay at Taiyuan," the female worker said. "They want to go back where they come from."

Mr. Woo said the presence of different employee groups may have caused an initial conflict to escalate.

Worker-rights groups have said that the pressure of production increases and the introduction of workers from other factories can increase stress on the factory floor.

Hon Hai's move inland has included an effort to decrease turnover by hiring workers who live close to factories, instead of using migrant workers who live in dormitories, according to analysts.

Hon Hai has defended the work conditions at its factories. Earlier this year it agreed to change its labor practices after an outside audit found widespread breaches of work rules, including 60-hour workweeks and regarding health and safety.

Analysts said the scale of Hon Hai's operations and the tedious nature of the work mean difficulties for the company likely will continue.

"It's like the Industrial Revolution," said Sanford Bernstein analyst Alberto Moel. "People are unhappy about a combination of low wages and the fact that they're doing a menial job, and you'll be seeing that for a long time."

The rise in unrest among China's laborers also has brought increased government pressure to keep a lid on incidents. Xie Shuying, an activist at the Migrant Worker Center, a Shenzhen-based group that helps educate workers on their rights, said the group has been harassed by the local government for the past year.

—Yang Jie in Shanghai and Ian Sherr in San Francisco contributed to this article.

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